Despite the speculation, the Bank of England voted to keep interest rates on hold at 0.5% today. The Monetary Policy Committee (MPC) voted 8-1 in favour, with one member seeking an interest rate cut.
The effect of the decision on sterling has been one of strengthening, although sterling had already begun to do so in the wake of Theresa May being announced as the next Prime Minister. The markets seemed to welcome the news on the new PM as it reduced the political uncertainty the UK faces, with a new government in place less than three weeks after the EU referendum took place.
However, the economic outlook for the country remains highly uncertain. And in all likelihood, a cut in interest rates and/or further quantitative easing seems likely as there’s already evidence of falling commercial and residential property prices, as well as delayed investment from companies. Indeed, many consumers and investors seem to be adopting a ‘wait and see’ attitude for now.
Although interest rates have been held at 0.5% today versus the drop that was expected by many commentators, cash remains a difficult investment to justify. Weaker sterling is likely to cause inflation to spike as imports become more expensive. When combined with the potential for a fall in interest rates, the real return on cash balances (i.e. after inflation has been deducted) could soon be negative.
Property prices
However, holding some cash at the moment could be a sound move. After all, the outlook for the UK economy is very uncertain and asset prices could fall. Certainly, that looks to be the trend for commercial property and now residential property. Today’s data from RICS shows that just over a quarter of surveyors said they expect a drop in sales in the next three months. That’s the most negative reading since 1998. To put that into perspective, the outlook was brighter in the absolute worst depths of the credit crunch.
Furthermore, new buyer enquires dropped significantly in recent weeks, with RICS stating that 36% more surveyors reported a fall in interest as part of the June housing survey. That’s the lowest level since mid-2008 when the credit crunch was just about at its worst.
Clearly, things are set to get worse for the property market before they get better. And with bonds likely to offer rather poor real returns if inflation increases, the best option for investors seems to be equities.
Equities and opportunity
In fact, equities seem to offer the perfect mix of geographic diversity that may be useful if the UK experiences a downturn, as well as high levels of liquidity in case cash is needed by an investor for other uses. In addition, shares continue to offer high yields and low valuations, with the FTSE 100 still being well below its all-time high. This means the margins of safety on offer are relatively wide and that long-term investors may be able to pick up a number of bargains in high quality companies that are likely to increase profitability in the coming years.
Of course, the present time may be a difficult one for investors in a wide range of assets. However, for well-diversified and prudent investors who take a long-term view, whether interest rates continue to be held or are cut, the uncertainty created by Brexit may prove to be a major buying opportunity.
